Latest Stories

The
IRS has issued proposed regulations to update the rules that
apply to U.S. taxpayers that fail to file gain recognition
agreements (GRAs) when they transfer certain property to
foreign corporations in nonrecognition transactions (REG-140649-11). The proposed rules would
change the standards under which transferors are required to
recognize gain on the transfer of stock or securities.

Under Sec. 367(a), if, in any exchange described in Sec.
332, 351, 354, 356, or 361 (i.e., a nonrecognition
transaction), a U.S. person transfers property to a foreign
corporation, the transferee foreign corporation is not
considered to be a corporation for purposes of determining the
extent to which gain is recognized on the transfer. This
results in recognition of the gain by the transferee.

One exception to this recognition treatment, however,
involves the U.S. person’s transfer of stock or securities to
a foreign corporation as long as the transferor files a gain
recognition agreement (GRA) and “other related documents.” The
GRA must require the transferor to agree to include in income
the gain realized but not recognized on the initial transfer
of the stock or securities and to pay interest on any
additional tax due if a gain recognition event occurs during
the term of the GRA (generally 60 months following the close
of the tax year in which the initial transfer occurs). One
gain recognition event is the failure to comply with any
requirement under the Sec. 367(a) regulations (which include a
requirement to file an annual certification) or any
requirement in the GRA.

Under existing regulations, if
there is a failure to comply with the Sec. 367(a) rules or a
failure to have filed a timely GRA for the initial transfer,
the U.S. transferor must recognize the full amount of gain
realized on the initial transfer of stock or securities unless
the U.S. transferor demonstrates that the failure was due to
reasonable cause and not willful neglect. The proposed
regulations would change this rule so that the U.S. transferor
would have to recognize the full amount of gain only if the
failure to comply was “willful” as that term is defined in the
civil penalty provisions, e.g., if it was the result of gross
negligence, reckless disregard, or willful neglect. Whether a
failure was willful would be determined based on the facts and
circumstances; the proposed regulations contain examples
illustrating the application of the standard.

In
related rules, under Sec. 6038B, a U.S. person who transfers
certain property to a foreign corporation in certain
nonrecognition transactions must report the transaction by
filing Form 926, Return by a U.S. Transferor of Property to
a Foreign Corporation, identifying the transferee
foreign corporation and describing the property transferred.
The penalty for not filing Form 926 is 10% of the fair market
value of the property at the time of the exchange, not to
exceed $100,000 unless the failure was due to intentional

disregard of the reporting obligation. If the U.S.
transferor demonstrates that the failure was due to reasonable
cause and not willful neglect, no penalty is imposed.

However, if a taxpayer complies with the GRA requirement,
existing Regs. Sec. 1.6038B-1(b)(2) exempts the taxpayer from
filing Form 926. But, if a taxpayer fails to comply with the
Sec. 367(a) GRA requirements and fails to file Form 926, the
taxpayer could be subject to both penalties: the recognition
of gain and the 10% of value penalty. Under the existing
regulations, a taxpayer can avoid the Sec. 6038B penalty by
demonstrating reasonable cause; the proposed regulations do
not change this provision to the willful standard that would
apply under Sec. 367. They do modify the information that must
be reported on Form 926 and would require that a Form 926 be
filed in all cases in which a GRA is filed.

The
regulations will apply to documents or statements that are
required to be filed with a timely filed return on or after
the date the regulations are published as final in the
Federal Register and to any requests for relief for
failures to file any of the required documents and statements
for requests submitted on or after that date.

The winner of The Tax Adviser’s 2014 Best Article Award is James M. Greenwell, CPA, MST, a senior tax specialist–partnerships with Phillips 66 in Bartlesville, Okla., for his article, “Partnership Capital Account Revaluations: An In-Depth Look at Sec. 704(c) Allocations.”

Magazine

Don’t get lost in the fog of legislative changes, developing tax issues, and newly evolving tax planning strategies. Tax Section membership will help you stay up to date and make your practice more efficient.